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A Capital Decrease? Good Defense, Good Offence

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A Capital Decrease? Good Defense, Good Offence

Source:Huan-Shih Yang

A capital decrease at UMC and an increase at UMC-invested HeJian Technology in China... Is UMC pulling out of Taiwan? Or does it have something else up its sleeve?

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A Capital Decrease? Good Defense, Good Offence

By Ming-Chun Chen
CommonWealth Magazine

At a February 7 investor conference, an International Data Group reporter asked Jackson Hu, the current chairman of United Microelectronics Corporation (UMC), “Are you going to sell UMC to a private equity fund?”

Hu brushed the idea aside, replying, “I’ve never talked to a PEF.” 

Rumors of a private equity fund (PEF) buyout have been continuous since UMC announced a capital decrease on January 23 and reimbursed shareholders NT$57.393 billion. A UMC capital decrease at the same time PEFs are practically invading the island, and with a concurrent capital increase at HeJian Technology Co. (HJTC) – the semiconductor company in Suzhou, China with which UMC frequently partners – makes one wonder precisely what is on the mind of UMC’s former CEO and current honorary chairman, Robert H.C. Tsao. Is he thinking of pulling out of Taiwan? 

“The two things have nothing to do with each other,” Jackson Hu declares.

Market analysts also suspect that this capital decrease is the result of the semiconductor industry hitting a plateau period accompanied by little chance for growth. “Their position in the market is sufficiently stable,” says John C. Chang, presidentof the Nomura Research Institute’s Taipei branch.

“Over 50 percent of the market is composed of self-owned funds, a ridiculous ratio when compared to the 10 to 20 percent market share it has in Japan—this is merely a return to normal,” says Chang.

No Major Short Term Investments

No matter how you look at it, a capital decrease means that UMC has no major investment plans in the short term. In such a capital- and equipment-intensive industry, only continuous investment can ensure market leadership; but UMC, as one of two domestic wafer industry leaders, now seems to lack the ambition to overtake Taiwan Semiconductor (TSMC), and faces pressure from Singapore’s Chartered Semiconductor Manufacturing (CSM) and China’s Semiconductor Manufacturing International Corporation (SMIC).

TSMC plans on capital investments of US$2.6-2.8 billion in 2007, UMC US$1-1.2 billion, CSM US$800 million, and SMIC US$700-720 million. Not only is UMC now way behind TSMC in investments, it is allowing its lead over CSM and SMIC to close.

“Where does UMC position itself with reference to TSMC and SMIC?” asks Citigroup Semiconductor analyst Andrew Lu.

“More effort on the basics, specifically wafer contract manufacturing,” is Jackson Hu’s reply. Of UMC’s NT$32.6 billion in profits last year, 90 percent was derived from reinvestments from a number of companies outside of the industry, including Mediatek, PixArt Imaging, Silicon Integrated System Corp., and Novatek.

Hu’s words clearly point out UMC’s course in the post-Tsao era. After the capital decrease, UMC will refocus on its core technologies and break its close ties with certain IC design plants.

Capital decrease is a moderate course in financial manipulation. But in the case of UMC, it means something more.

Combined with the news of a capital increase at HeJian, it has generated a lot of speculation.

More Wriggle Room

For UMC to retain its controlling stake in HeJian, major shareholders must inject more capital. “They are essentially taking what was originally invested in Taiwan for distribution in China,” says Peng Kuo-chu, an analyst at the Industrial Technology Research Institute.

UMC can strengthen its China distribution through HeJian. HeJian’s 8-inch wafer fab, with its 40,000 monthly manufacturing capacity, is a flexible asset. “UMC’s purchasing wafer fabs in China through HeJian is a definite possibility,” says Peng.

If we put the two companies together, UMC’s capital decrease not only poses no threat to growth, but also provides greater room for maneuvering.

A PEF will not need a great amount of capital to buy out UMC. If that happens, UMC will be able to follow the example of Advanced Semiconductor Engineering (ASE) in getting around the 40 percent upper limit for China investments imposed by the Taiwan government, and put an end to the government’s contentious probe into UMC’s ties with HeJian, which have led to fines, as well as criminal investigations of Robert Tsao (which led him to formally relinquish the chairmanship to Hu).

Conversely, UMC now has more bargaining power in its negotiations with government. If the government wants to prevent UMC from doing as ASE has done, delisting in Taiwan or listing in a third location, it may have to provide more room for negotiation on China investment restrictions and the HeJian probe. “This is a smart move – taking one step back to give myself more wriggle room,” Peng observes.

Tsao has made his move, and now must await government reactions.

If UMC had more leverage in negotiating changes to the government’s China investment ceiling, and in the HeJian probe, it would be able to link its operations in Shanghai and Hsinchu, with HeJian serving as a stronghold for its global distribution. Should UMC delist itself from Taiwan as did ASE, HeJian may well become the center of UMC global operations.

Translated from the Chinese by Ellen Wieman

Keywords:

好友人數